Delayed FTC Investigations Could Cause Case Dismissals, Hurt Economy, Experts Say

Although FTC’s shutdown memo “exempted” from furlough employees prosecuting current litigation and managing current and any incoming merger and acquisition filings, refusals by judges to allow extensions could soon strain FTC resources, lawyers said. If the shutdown eclipses a full month, defendants could start filing motions for case dismissals, said technology and communications lawyer Michael Hazzard of Arent Fox. If the short-staffed Bureau of Competition becomes unable to process a growing docket of M&A filings, various industries could undergo unalterable shifts, said an antitrust lawyer who is a former government official.

The Bureau of Consumer Protection has been staffed to manage its 75 cases currently in federal district courts during the shutdown, said the FTC shutdown memo (http://1.usa.gov/1946pkj). FTC attorneys have applied for stays in many of the cases, including the online marketing fraud case against Jeremy Johnson (http://bit.ly/1c5xeG9). Opinions vary on how lenient judges will be in granting stays. “My expectation is that judges will be very accommodating with these requests,” Hazzard said. “For a while.”

That “for a while” might only last another few weeks, Hazzard estimated. Judges overseeing FTC litigation are more likely to grant a continuance or stay with an upper limit, such as “not to exceed 30 days,” Hazzard said. While monthlong delays are not uncommon in federal litigation, if judges have “something coming up pretty soon and they've cleared out their calendars to have a trial,” it can be hard to reschedule on their packed docket, he said. The federal judge in the Johnson Case, Miranda Du, denied FTC’s petition for a stay (http://bit.ly/17jkLHe), citing that exact reason. There are a number of experts scheduled for questioning this month, and a delay of a few weeks could extend the case several months, wrote Du. “Further delay would work to prejudice the defendants, as well as consumers whose interest the FTC seeks to protect” (http://bit.ly/19xjahK).

The FTC also has an obligation to pursue its case, Du said. If other judges choose to grant FTC stays of longer than a month, a defendant’s counsel could file a motion to have a case dismissed on grounds the FTC is failing to pursue its case, Hazzard said. Think of it “in terms of prejudice,” he said. The defendant can argue, “Gosh, they just want to keep us under the weight of their thumb for an indefinite period, and we have no authority to defend ourselves,” Hazzard said. If that argument leads to cases being dismissed, “I think the right answer is to have that be a consequence of the shutdown,” he said. The public should see that people get “let off the hook because the government isn’t giving the FTC money to prosecute their cases,” he added.

But the FTC is unlikely to let cases slide, said Maryanne Kane, an antitrust lawyer at O'Melveny & Myers and former chief of staff to two FTC chairmen during President George W. Bush’s administration. “If they aren’t given extensions, then they're working” said Kane, who was with FTC during the last government shutdown, in 1995-'96. Though Kane has been receiving email bouncebacks from “key people” at the agency, saying they can’t respond until the government reopens, the agency has designated 96 of the Bureau of Consumer Protection’s 331 employees as necessary to handle the current cases on the docket. By a small margin, that’s the highest percentage of exempted employees in any FTC bureau or office. The shutdown memo stated the the bureau also “typically” has 15 to 25 open investigations close to being filed in federal court, though it’s unlikely any of those will be filed during the shutdown, Kane said.

"If you've got a deadline and it would adversely affect the agency, you can’t ignore it,” Kane said. That’s why the FTC is still accepting M&A filings, several lawyers said. The agency is statutorily required under the Hart-Scott-Rodino Act to accept merger filings and respond within 30 days. The FTC has staffed its Bureau of Competition with 82 employees to manage the roughly 250 “active matters” on its docket, said the shutdown memo. Those employees have also been handling any new transaction filings, normally about 25 each week, the memo said.

The FTC’s M&A work has the biggest potential effect on the economy, Hazzard said. “They're very cognizant of the impact they have on business.” A completed deal can change product prices, alter staffing patterns, transfer intellectual property rights and dictate research and development decisions, said an antitrust lawyer. So although the Premerger Notification Office’s website is down, the office has remained open, fielding calls and accepting filings through the mail or in person, said an office representative. Most premerger filings were already submitted via hard copy, not electronically, said communications transaction lawyer Lew Paper of Pillsbury Winthrop.

The shutdown could still cause M&A investigations to pile up, said several lawyers. A prolonged shutdown could leave returning workers with too little time to fully investigate a deal, creating “a big backlog,” Hazzard said. The FTC could handle the glut by filing second requests for each pending deal, said a former antitrust official. A second request requires companies to submit additional information, pausing the transaction and giving the agency time to complete its investigation.

Nothing prohibits the FTC from opening after-the-fact lawsuits to undo deals consummated before the agency could review the filing, Hazzard said. But that can be difficult, he added. One lawyer compared it to trying to unscramble eggs. Irreversible decisions get made during mergers, Hazzard said: Employees get laid off, intellectual property shifts hands. If those decisions hurt competition in an industry, the end result could be a loss to the economy, Hazzard said.

FTC’s website shutdown has already had a tangible effect on some industries, said Association for Competitive Technology Executive Director Morgan Reed. The FTC has staffed itself to handle ongoing litigation and merger filings, but shuttered its rulemaking, data gathering, and information dissemination components. Without access to FTC’s information on complying with the Children’s Online Privacy Protection Act, Reed said application developers ACT works with were unsure how to proceed with various projects in development. ACT helps 5,000 small- and mid-size app developers and information technology firms, often educating them on federal regulation compliance.

Developers flooded a 1,500-person ACT online forum asking where they could find COPPA compliance information after FTC pulled down its website, Reed said. The FTC’s website has the actual COPPA regulations and an additional 180 frequently asked questions to guide app developers. ACT spun off those COPPA-compliance questions into a separate thread. On Thursday of the shutdown’s first week, ACT posted (WID Oct 4 p10) an archived version of FTC’s COPPA-compliance FAQs (http://bit.ly/1a2xj8E). The association was worried app developers were pushing off projects or cancelling plans for new apps until they readily had access to COPPA-compliance information. “We understand the FTC has to be closed, but that doesn’t mean developers stop working,” Reed said. “The developer community needs this guidance to make apps that meet regulatory standards.”

ACT is reassessing its upcoming regulation compliance seminars in light of the shutdown, Reed said. The FTC frequently partners with ACT to conduct around the country webinars, town halls and forums for developers. With that component of the agency shuttered, ACT is receiving more requests for this type of information dissemination without the FTC as a resource or financial crutch, Reed said. “I think we'll find we may have to answer more questions with, ‘We don’t know.'”

Once the FTC reopens, some of the its data may be incomplete, Kane said. During the shutdown, the FTC isn’t accepting any public comments or consumer complaints about the myriad issues it oversees, including drug advertising, pricing issues, data security breaches, identity fraud and telemarketing. “Will some of the consumer callers not bother to report their complaints in a couple of weeks? Maybe,” Kane said. “I think some people will find other places ... So [the FTC] may lose data and have incomplete records.” Technology Policy Institute President Thomas Lenard cautioned that the FTC’s self-reported data isn’t “tremendously useful” because it lacks systematic collection procedures. Lenard said he doesn’t rely on FTC data when researching privacy issues, for example.

The lingering effect on the FTC itself might be lowered morale, Kane said. She recalled FTC’s roomy Washington headquarters during the 1995 shutdown as “like being there the day after Thanksgiving -- very quiet and very alone.” Isolated FTC workers are in a position where they are dealing with severely restricted staffing while watching other federal litigating agencies like the SEC remain at full capacity, Kane said. SEC’s appropriations language gives the agency access to any carryover funds at the end of a fiscal year in the absence of Congressional appropriations, said an SEC spokesman. Kane said she thinks “the biggest frustration for someone who is not working [at the FTC] is that they feel as if their work is not valued as much as they value it.” (cbennett@warren-news.com)